Can you trust the Banks?

Today, I went to Hang Seng bank (arguably the best bank on service in HK) to do a term deposit for my wife.

I'll go straight into it, here's the deal.  New money 3month fixed term deposit rate is 1.75%, old (existing) money is 0.9%.  This "new" vs "old" money scheme is retarded as customer can game this easily by moving the money to another bank with new money rate, and then switch back to Hang Seng Bank to get a 3m new money rate on maturity, then back to this other bank (say StandChart) on maturity and keep repeating this to enjoy the new money rate on every term deposit renewal.  

Online Hang Seng Bank 3m rate is 0.05%, can you believe it!?  That’s outright deceit when other banks are offering >2%pa for the same 3m term.  Why would bank offer inferior rate online, and/or for existing customer on "old" money?  That's because they want you to keep the money in your current/savings account with no interest.  And most people cannot be bothered (or no time) to go into a branch and negotiate a better rate term deposit.  The bank makes you jump thru hoops to get that better rate.  They are making money out of your inertia or ignorance (information asymmetry), or simply put, taking advantage on your weakness.

We end up getting a 3m rate of 1.65% (remember the original quote for existing money was 0.9%) vs the new money 3m rate of 1.75% vs HIBOR of 2.12% (https://www.hangseng.com/en-hk/rates/hibor/). So the bank is still making 2.12-1.65=47bp out of this “negotiated” term deposit.  Could I get a better rate elsewhere?  I am sure I can, but we need to pick up our daughter from school after her ECA.  Time (the most precious resource in life) is better spent on family than the best possible money deal. But we need a plan-B on maturity.  Wouldn't it be nice if the bank can always roll our term deposit at the best possible "new" money rate?  

When we were about to finish on the paper work, the bank manager asked us whether we want to auto-roll the term deposit on maturity?  Are you serious!?  Can I trust that you will auto-roll that deposit at the best possible rate after all that?  Are you really that thick-skin to ask us to give you another opportunity to screw us?

Imagine you have a partner who will always take advantage of you if/when you don't pay attention.  There's no trust, you'll always need to check on him/her to avoid getting screwed.  Life is too hard (and too short!) dealing with someone (or businesses) like that!  Now imagine another partner you can trust that he/she will always look after you and give you the best possible deal and keep improving on that customer experience.  Wouldn't you go back to them like clock work?  That begs the next question, on a day-to-day basis, what type of business can you trust and what type of business you can't?  Bank operates on the motto of screwing ignorant or lazy customers.  New age biz model operates on the motto of giving customers the best deal/experience/transparency without customers even asking (eg Costco / Bookdepository).  

The next question is then would banks make a good investment since most people don't have that information advantage or time to shop around, hence banks can make outsized money?  My thoughts on this is that there shouldn't be any conflict on customer vs shareholder interest.  High quality earnings that warrants higher PE ratio comes from making consistent stream of income when customers keep coming back like clock work (vs inconsistent higher margin income from ignorant customers).  When it comes to investing, we should really be focused on companies with that high quality subscription model, and a sustainable long term win-win mindset.  Banks might not be a sustainable long term investment given their I-win-you-lose mindset (I haven't seen a bank operates on a win-win mindset yet).  When you look after your customers, the rest (including money) will take care of itself.

What I learnt in Feb 2018

Books/Letters:

- Dear Chairman, this is a good complement to the King Ichan book to understand a bit more about activism and it's evolution.  To change people is hard (and entrenched people is even harder).  Activism is a 10 feet hurdle way to invest.    This book also gives a good picture on the social mechanics of the Board dynamics.  

- Joe Zhang's book on how Fintech in china saved the banks by absorbing all the questionable and low standard loans.  

- Fai Go's book on a couple of interviews with local investors.  One of those was a ex-Value Partner PM. 

- Read lots of letters this month, CLC, First State, Hayden Cap, Saber Cap, Buffett interview, DJCO transcript etc.  but all a bit fragmented.  Perhaps a more focus way is warranted by having a theme every month.  (Someone asked Munger about difficulties CPG is facing, the answer was despite we know the answer, we subconsciously deny it. A reminder on bias.)

- A good article with lots of example on use of EBITDA (https://www.toptal.com/finance/financial-analysts/ebitda)

Work:

- thinking a bit more about how to find growing companies that has low capital requirement; and how to find companies that has operating leverage.

- thinking a bit more about the RV Shake Shack mindset on investing.  Is that speculation vs investing?  How certain are we on consumer taste change, execution, and competitions when we are looking into the future? Bond proxy (quantitative certainty) vs Compounder (quality assessment)....

- Stephen showed me how 0400.HK played with their financial statement where the loan to third party is booked in OCF to give the illusion of better OCF than it really is.  

- we also discussed whether there's much value add from good trade execution.  Stephen uses a trailing stop on exiting positions to maximise irrational exuberance.  I use a staggered approach.  I question Stephen on whether he would do the same trailing method on accumulation.

- tried to understand a bit more about the Neff's total return approach as I never really understand qualitatively about the Overlook PE=(ROE+g)/4 meaning.  Created a ranking system using the Neff total return PEG ranking approach to allocate how we spend time on research.

- had a bit of revelation on Tax minimisation schemes when we're thinking about our fund structure.  Martin Lau puts it succinctly, they don't like companies spending too much effort on the same.

- i have come to realisation how i don't like the commercial aspect of funds management. Alignment shouldn't be just lip service.  

Personal:

- I have a new revelation about problem solving.  I had a fight with a cab driver as he was blocking the road waiting to goto the public loo in Happy Valley.  Instead of solving his problem by asking him nicely to move a bit forward so that i get room to pass, i turned a bit impatient and scold him for being inconsiderate.  Sometimes, to achieve what you want, the most effective way maybe to solve other people's problem as well.  That's the most rational way to achieve you purpose, but may not be the most emotionally appealing way.  

- Buffett said first priority in life is raising (and i read influencing) kids

- Depth vs breadth when it comes to extracting meaning (The Fault in Our Stars). Being loved deeply rather then broadly.  Good movie.

What I learnt in Jan 2018

Modern Monopolies (https://www.amazon.com/Modern-Monopolies-Dominate-Century-Economy/dp/1250091896)

The one thing i learn from this book is that platform is the new age biz model.  The old capital intensive vertical supply chain biz model is now challenged by platform model.  A biz model that can cut down on transaction cost and connect the producer and the end user will thrive.  The author gave many examples on how to be successful as a platform, as well as many examples on failure.  Bottom line, getting to that critical mass, and being able to encourage good behaviour on the platform are key to success.  Come to think about it, old economy company can be a platform as well, BRK is a platform to some extent.  CPG companies like Unilever is becoming more like a incubation platform for emerging brands.

Good Stocks Cheap (https://www.amazon.com/Good-Stocks-Cheap-Confidence-Outperformance/dp/B073W3589D/ref=sr_1_1?s=books&ie=UTF8&qid=1517986837&sr=1-1&keywords=good+stocks+cheap)

Nothing ground breaking.  The author is a Stanford professor.  The book offers assessment frameworks from industry to company strategy to valuation to Psychology. It was a referral from the Safal value newsletter.  

Chasing Subprime Credit - How China's Fintech Sector is Thriving - Joe Zhang

Got a better understanding on the issue and how small lenders make money.  the authors also argues that this sector helped china banking system to avoid the subprime issue and in a way, why the high debt and shadow banking issues in china may not be such a big issue.

From work:

• Spoke to accountants regarding Cayman setup, what are the tax issues on perf fee
• Work on our own checklist.  I find having sections and structure to the checklist is as important
• Read a few investment letters.  RV, Platinum, Howard Marks, Hayden Cap.  the shake shack example from RV is an interesting case study on his investment mindset.  
• Having a conscious mindset in trying to learn when asking question (https://medium.com/@timhanso/the-questions-that-matter-46c5dd978f0c)
• How to make sense out of Amazon's valuation?  It's the FCF, but need to adjust Op Lease, and split CapEx into Maintenance CapEx
• Worked on filter/screener to find companies that exhibit low capital intensiveness with growing revenue/EBIT/OCF.  An idea from the Modern Monopolies book
• Looking into P&G and the Peltz whitepaper.  management structure to align accountability is very important.

Other sources:

• caught up with Chris Xu for lunch and he explained how the PE guys just want to get the deal done and suffer from lots of bias.  the supposedly long term view gives room to lots of hiding space
• what a turnaround in VW!  great article in FT
• good blog on Amazon OCF writeup.  finance lease should be accounted for in OCF, and it is necessary to split maintenance capex in this case to fairly evaluate the improvements in OCF.  (http://mp.weixin.qq.com/s?__biz=MzA5MTAxMjEyMQ==&mid=2653500060&idx=1&sn=3efe5fd45787a42411943fb60aa288d2&chksm=8bdf7feabca8f6fc643545f0cea4e295859daf7bc52bc4f09b0ed84a42aba17be10b681eed9a&scene=21#wechat_redirect)

Tail risk management

Munger says: "Tell me where I am going to die and I won't go there"

Buffett also continuously assess the odds of Berkshire suffering from a permanent loss of capital event.

The above line seems trivial but beyond it's face value, it's a whole set of risk management philosophy.  A friend sent me a whatsapp telling me about this book "How will you measure your life?"  which prompted me to think a little more about this topic.  The key is to stay in the game and don't hit the ball out of the court.  So how?

It's all about tail risk (events that can impact life in a big way) management in the end the more i think about life, be it finance, work, health, kids, relationship etc.  Always think about what's the worst case (一鋪清袋) events that can possibly happen and how to prevent it?  The difference between this mindset vs 巳人憂天 is there's an action plan about the tail risk event.

Possible tail risk (一鋪清袋) events and prevention measures:

Work - Tarnished reputation; Losing professional qualifications; Violating laws, compliance rules or ethical standards; etc.  Prevention: Honesty and integrity is the best policy here

Finance - Permanent loss of capital in investments (paying way beyond intrinsic value, oversizing,  accounting fraud, technology obsolescence, permanent loss of pricing power, etc).  Prevention: Study and practice Value Investing!

Kids into drugs, gambling, stealing, greed and other temptation, reckless driving, violating the law.  The goal here is the kids will grow to become independent and not a burden to the society. Prevention: Have a good relationship with the kids and the ability to continue to influence them the right way.

Inability to cover big health bills (unless relying on public safety net).  Prevention: Exercise, and sufficient insurance.  

Broken family -  Broken trusts and bad relationships.  Prevention is to avoid (not just resist) bad temptation (君子不立危牆下) and be faithful to your spouse; be aware of the animal spirit in human nature (our wiring).  Be patient and always reflect.

Natural Disaster - there's no prevention here, only preparation.  One of the preparations is having enough cash and be mobile enough to go somewhere safe very quickly.

What I learnt in March/April 2018

Fooling some of the People all the time (https://www.amazon.com/Fooling-People-Complete-Updated-Epilogue-ebook/dp/B004D4YO6A/ref=sr_1_1?ie=UTF8&qid=1523785012&sr=8-1&keywords=fooling+some+of+the+people+all+of+the+time) 

Einhorn is a very smart and detailed guy.  Most people have heard of the story, i guess what the book really showed me were:

1. How much detail is detail?  It redefines (or explaining properly) the word "detail"

2. The reason that Shorting or Activism Shorting is a 10ft hurddle to make money as the target company will do anything to defend themselves.  Whitley Tilson's recent exit  provided another example here.
3. A new appreciation on what is bad credit policy.  What are the games to play in small business lending?  Do i really understand a bank's lending and credit policy? Which leads to...
4. What is a financial institution's risk philosophy and corporate culture? 
5. Incentive scheme and benchmark drives behaviour (SBA's incentive to lend where the pool size is the benchmark)

Morris Chang's Autobiography - Part I (in Chinese). http://idreambooks.com/Morris-Chang-s-autobiography-last-magazin-by-tian-xia-yuan-jian-ch/reviews/1004352  

Great book! Worth re-reading.  Unfortunately, Part II is not out yet even after 17 years of Part I.  Few things I learnt there:

1. Successful people do read a lot, and life long learning is (one of) the meaning of life
2. Innovation and the culture of innovation is so important in a corporate
3. Possessing knowledge is not enough, application is what make you rich.  
4. TSMC itself is a disruption which changed the whole semi industry in 1987.  A disruption that created the Fabless industry by changing the model.  He contributed significantly to the flourishing of the IC design industry 
5. reward innovation and don't penalise failure
6. Have a diverse interest before specialising.  The diverse interest helps to build mental models.
7. he is a thinker, very rational and logical in analysing a situation.

The Sam Zell Book.  https://www.amazon.com/dp/1591848237/ref=as_at?creativeASIN=1591848237&linkCode=w61&imprToken=3wQQDzPZd4SKxBHcKQh4hQ&slotNum=0&tag=thneyo0f-20

Started his ppt management biz while he was in university.  He is a big picture and decision guy while his parter Bob Lorie a detailed numbers guy.  He went from property investing to corp investing.  His philosophy is similar to that of his ppt investment style where he was a distress player.  He calls himself the grave-dancer.  Like the way he bought the $4b portfolio of property asset with $1 just by guaranteeing the bank the next 3 year cash flow (bought an upside call), he bought a portfolio of companies with good business but bad balance sheet and formed his own conglomerate, funding the cash strapped biz with the real estate biz with consistent CFO.  He is a bit of a boardroom activist as well.  He asked the board about Return on CapEx, and ROIC and the board was stunned.  I find the Return on CapEx concept easier to understand than that of ROIIC.  Buying property at cheaper than replacement cost is an important concept.  Replacement cost can be interpreted as book value, or literally the cost to build that biz from scratch.  This is how i should think about price to book, the price to rebuild the biz.

Work/Other's

• Stephen took me to the TK analyst meeting and get to learn more about how he sees TK which is growth at a reasonable price. 
• Met with Dream's CFO Mr Lee and learnt about Dream Int'l.  This one is a really growth at a bargain price idea except it's different to TK where the growth is less "exciting" and they don't have a technological edge compared to TK.  Scale and Quality is the selling point.  The boring OEM model and the reporting issue in 2009 is probably why it's trading at a discount (http://www.hkexnews.hk/listedco/listconews/sehk/2013/0918/LTN20130918514.PDF)

• Looked into HKTVMall.  I like their culture, alignment, drive and energy.  Ricky Wong has good track record.  The fact that he is exiting TV biz is a plus.  But this is a harder investment decision (a high hurdle) given it has no free cash flow (yet), and the industry changes a lot faster than many other industries i am accustom to.  Competitions according to Ricky Wong is good, but the potential competitiors can be so powerful and resourceful that can really dwarf them.  This is a hard one but at the same time, payoff can be great.  Hence this one is like a call option.  Problem is sizing? It cannot be big given downside, and that means it won't move the needle.
• Looked briefly into RB.  A CPG that i like better than others because i think milk powder and Condom have better brand differentiation and less disruption by eCommerce on distribution 
• Meeting Fund Admin candidates, this is probably the most expensive on-going cost in having a fund.

What I learnt in Dec 2017

From reading

• Listened to King Ichan the biography on Audiobook (https://www.amazon.com/King-Icahn-Biography-Renegade-Capitalist/dp/1494348926). I had to fight my bias to listen given i think he is a p****k.  The book turned out OK.  Ichan is a value investor but took the provocative way to realise the hidden value him and Kingsley identified.  TWS the Airline was a mistake to him.  But there's something to learn from his negotiation skills.  He probably enjoyed outsmarting management on negotiation (for his greenmail offer).  But in the end, working alongside the right management rather than trying to outsmart management is probably a better way for my personality
• Read the book Common Stock - Common Sense by Edgar Wachenheim who is the founder of $6.6bn Greenhaven Capital (https://www.amazon.com/Common-Stocks-Sense-Strategies-Particularly/dp/1119259606).  There are many examples in how he bet correctly in housing and housing related sector (such as Lowe).  There was a case on IBM as well as his mistake in AIG.  
• Listened to a summary of the Mindset, by Carol Dweck (https://mindsetonline.com/whatisit/about/).  Being concious about having a growth mindset is important (for me and for the kids).  

From work

• Further research into the CPG sector.  Unilever this time.  Thinking more about what is a brand, is it the channel and distribution?  Personal Care has higher margin than Foods.  Is having a higher purpose (like Unilever) really going to be more advantageous than maximising shareholder value?  Here, i used Euromonitor more to see how competent management is by looking at how they nurture brands acquired. 
• Watched a couple of YouTube where Brito (CEO of AB InBev) gave talks to biz schools.  Dream / People / Culture.  Ownership alignment differentiates them.  And they are being portrayed as more evil than warranted. They just execute the spirit of Capitalism better than others but unfairly evilised.

From Conference/Seminar

• Attended the RICS valuation conference (got a free ticket from HKSFA).  Given IFRS 13, there's more requirement on valuation work and it almost become a profession in it's own right.  This is a good thing, as financial reporting will have higher standard.  Suffice to say though, i wasn't particularly impressed with the pros in this regards.  I consider myself an amateur in valuation, and these pros didn't give me anything ground breaking.
• The SFC presentation on how they're filtering and suspending companies is a good one though.  And that China may be more advanced than HK on financial reporting valuation standard

Others

• See my note on Nagomi, a case study on my attempt to become a businessman but unsuccessful.  

Buffett said, I am a better investor because i am a businessman, and i am a better businessman because i am an investor.  So with that, I'm planning to carry out the following experiment.  

—————————————————

A small Japanese restaurant in Happy Valley (Nagomi)

The biz is for sale after operating by the same owner(s) for 12 years.  Currently, there are 3 pay staff, Jacky (10 yrs) and Chef Kan (9 years) ($20k per month), and boss Kalina $25k per month.  Revenue is around $200k per month.  Rental with 1 year open contract to run, is $54k per month.  The biz is roughly breaking even but definitely not making money.  Peter/Kalina are selling out due to financial difficulty according to Jacky.  Currently, they close every Thursday to satisfy labor law for a day off per week for staff.  Their famous dishes include Katsu-don, Unadon, and sushi.  Chef-Kan was ex-Shangrila.  However, Competition is intense in Happy Valley, with about 6 Japanese joints, but just two in the the mid-lower price tier.  Population is increasing though in HV, given more newly completed high-rise apartments.

My Proposal:

• I'll be 51% owner, we find another owner-partner (japanese speaking will be great) and the 4 operators (I am not an operator) will together own 49%.  This gives better incentive to all (maybe except Kalina)
• We'll pay Kalina $200k for the biz collectively, with $100k upfront, balance by instalment over 5 months for $20k a month subject to $200k revenue threshold.  If revenue reaches $250k, we'll pay her $30k per month.  If no one takes over the biz, the whole biz will be written down to 0 and shop front return to landlord
• The biz has no debt.  The $200k deal price was nominal, P/S=0.08, P/E~2 (assuming monthly profit after all cost is $10k).  Apparently someone is offering $250k, but my $200k is more attractive as i offer more ownership to staff.  But ultimately, my indifference (whether i get to buy it or not) mindset is important.  I should approach public equity with the same.
• Pay rise for all 4 staff to $23k immediately.  Admittedly, at $23k is still under market, but given profit sharing as owners, it should compensate for it.
• We'll nominate a shop manager, Assuming it's Kalina, she will get paid $25k (her old pay)
• If any of us want to sell, exisiting shareholder will get first right to buy given same price.  Ie I am happy to sell incentive shares to any existing staff if performance is good as a reward.

New Drivers

• Ownership incentive for Jacky / Chef Kan and the 4th staff-owner
• Given 1 extra staff, they will take turn for day off and we'll open for 7 days.  That should boast revenue from $200k a month to $233k per month, that will pay for the extra head count
• Given the awkward location, I'll help with more take away biz.  UberEats, Panda Foods and Deliveroo come to mind as established channels and good marketing.  Only cooked food (lower margin) will be targeted for take-away biz.
• Targeted FB Ads $2k per month, and flyers targeted to the Sanitorium Hosp staff
• Rejig Menu a bit (eg adding ice-cream and coffee, and cut down on less-frequent food items to save on COGS items)
• Add electronic payment to make customer experience easier

Other Operational arrangements

• Chef Kan will take charge of the Food Licence since he makes sushi, which is the most stringent from a food safety perspective (Peter is the license holder right now.  Apparently, to transfer license, there's a lot of work to the kitchen and the entrance which will render shop close for 2 months)
• We'll need to get (urgently) an alcohol license under Jackey since he serves alcohol the most;
• Will add a web-cam so the non-operator (me) can easily check biz, and also free Wifi for customers;
• Three signatories for bank account, Jackey and Kalina (and forth person) Two required to sign Chq and run bank account together (cross check mechanism)
• I'll oversee the accounts (the book)
• The toilet will need to be absolutely spotless
• Chef unform for Kan-sir

Consideration and Risk

• My upfront payment is the 51% of the upfront 100k, and my 51% share of the rental bond.  Subsequent payment is subject to revenue threshold. 
• Given the rental contract has passed the lock-up period, i can pull the pin by 1 month notice if i smell anything fishy
• Contingent liability (unpaid tax, suppliers etc) depends whether we operate under new vehicle or existing (new vehicle will need to open new bank account which is not trivial).  New management will need to be indemnified.
• Potential Unlicensed alcohol-supply panelty
• Rental increment which limits the life of the business beyond Nov 2018
• HR issue with if any license holder withdrew or conflict with each other.  This is mitigated by common shareholding interest
• Food safety issue.  This is mitigated by Food License to be held by the person who prepares the riskiest foods, namely sushi
• Peter is current license holder until we renovate and transfer the license.  If he sees biz pick up and ask for a share, then what?
• Turns out the license is expiring in Dec 2017 anyway, so we need Peter to renew.  And even if Peter is willing, and then transfer the license across to Chef Kan, given the Food Factory license, sushi is probably out of bound.  And alcohol is definitely out of bound.  And we're prob not qualified for a full license.  With so many operations operating on the edges, i doubt if it's worth it.

Outcome:

• I pull the plug on the deal after speaking to Mark, who ran a restaurant business before.  The food license Nagomi has is a Factory Canteen license.  Given 30m2 being the minimum for a Full Restaurant License, Nagomi probably won't qualify.  Which means they will not be able to get a Alcohol license either (high margin biz) and can only do BYO.  Even If we are able to upgrade to a full license, it requires re-submitting a Floor Plan and highly likely to also require 3 months of renovation to comply with regulations.
• The other concern also relates to license.  Peter the behind-the-scene owner is the license holder.  Carlina is suggesting keep the license status quo rather than doing a transfer as it requires compliance to new regulation.  But having someone not part of the biz to hold the license doesn't make sense.  If biz improves, Peter can come back and extract license rent from us.
• I am however indifferent in my mindset in this failed attempt.  That should be the attitude towards public investing too.  And this indifferent attitude is the foundation to being patient.  If i was eager or having a strong desire to own it, then i might give-in on my purchase criteria and making compromises, at the expense of long term return or even permanent capital loss.
• The experience gained in this exercise is definitely worthwhile.  I should attempt all public investing with a Nagomi mindset.

What I learnt in May 2018

Grinding it Out by Ray Kroc 

• Read the truth vs the movie site as well.  
• Got a better understanding of how the franchise system started and how the alignment drives the entrepreneurial spirit.  The system is amazing in it's scalability and consistency.  
• He didn't like conflict in his biz like he won't be part of the supply chain to his franchisee (cf Tim Hortons).  That's admirable and smart in the long run.  
• Speed (service) and value is something that will never change.  McDonald is a disruption in it's era where they deliver good value in a speedy way (service).  JD/Amazon all stressing delivery speed these days.  Fast fashion, Funko, Nike, all the new biz models stress speed as an element.  What doesn't change?  Speed, service and value!  
• Ray Kroc's obsessiveness in work cost him his relationship (first wife and daughter).  But happiness is defined as achievement.  He worked till he dropped.  

Antifragile

• interesting book and planted the idea of looking at companies with an Antifragile element.  BRK is one of those, it thrives in volataily and distress.  In a sense, any companie that has the balance sheet and mindset to expand in bad time is Antifragile.  Companies with Antifragile capability is like a hedge, a hedge against bad time.  The opposite is also true, buying companies that are a function of the market or with reflexivity is dangerous, ie brokers, banks and insurance companies as they're usually the first victim in a market downturn - aka fragile
• key words/concept: TIME is a friend to the Antifragile and has sharp teeth to the fragile; Jensen's Inequality; Convexity; Complex System (fragile); Large System (which are usually complex, hence generally fragile); Domain dependence; Path dependence; Asymmetric payoff; Optionality; Non-linearity; Lindy effect; Naive Intervention
• Talking about Naive Intervention, watching market has the same effect as visiting the doctor for non-critical illness.  Chances are that the doctor will prescribed some sort of medicine or procedure to "do something about it".  An example of that is blood pressure.  Sometimes you might encounter a high blood pressure measure.  Non-sophisticated doctor might prescribed high blood pressure medicine as a result, resulting in naive intervention.  The market, when watching frequently, is likely to induce some sort of action similar to the doctor prescribing medicine for non-critical illness.  
• Random element is a plus.  Investment process should incorporate enough randomness in it for it to be Antifragile.  The author uses the education system as an example.  You remember the book you've read by your own choosing, you don't remember any text book chosen by the curriculum
• Moderate stress is good to some extent.  Like our bone needs it.  Maybe a moderate amount of stress at work is also good??
• The individual component of an industry maybe locally fragile but the whole is Antifragile. An example of that is tech, biotech (new drug by a company may be made redundant, but the whole industry keeps moving forward) , etc.  hence for fast changing industry, perhaps it's better to invest by an aggregate mean than trying to outsmart with individual components.  Indexing is not a bad idea.
• Optionality helps with anti-fragility.  He argues that optionality is a hedge against ignorance.
• "The thing about tennis is not how good you play in a good game, but how you get yourself out in a bad game!"  it's all about how you carry yourself in bad times.  that's so true to everything in life, not just tennis.  And how you carry yourself in bad times means how Antifragile you are!

Capital Return

• Great book to remind me to look at the supply side in an industry rather then just the demand side.  Total addressable market (TAM) vs the total supply equation.  Watch out for the whole industry CapEx pattern/trend and don't invest when CapEx is unduly elevated (CapEx/Depreciation ratio is a good one to watch).  Asset growth (think china, and thanks to cheap money) at the company/industry level can be detrimental to real return.  Supply prospects are far less uncertain than Demand and should be the starting point in company/industry research.  it is supply that drives industry profitability.  Bank asset (and credit /loan) growth is also a good indicator
• Companies in industry with a supportive stable supply side justifies higher valuation.  Time to invest is when few players in an industry all exert "pricing discipline"
• This book reminds me of the allocation decision SwirePacific made regarding CapEx in buying more vessels at the peak of the oil cycle, and getting into big oil hedging contract at the same time.  Hence, i gave Merlin Swire (Chairman to-be) a copy of this book at the AGM

Others stuff worth mentioning:

A new way to look at the PE ratio.  Stephen taught me that.  PE, especially forecast PE, comprises of 2 elements, growth and certainty.  Within that, the term structure of growth and certainty is very important.  This helps me in understanding how people look at high PE names. It's because high PE means two things (1) high growth, or (2) high certainty, or (3) both.  A long run way is more important than high growth for a short period as it has less reinvestment risk.  I finally understand (i think) John Neff's Total Return = Dividend + Growth.  

The Huber article on inflation is also helping me in understanding why high ROE stocks make good compounders.  It's because the reinvestment is at book book value despite the initial investment is at high PB multiple.  

I studied Nike this month and think i understand pricing power a little better.  At least the pricing power in Nike vs CPG.  Buffett mentioned a bit about the tussle in channels for the CPG.  And how the eco system is the key to investing in Apple.  It's the consumer behaviour rather than tech.

The three investment criteria: 1) 10yr holding (desert island), 2) buying whole biz mindset. 3) Understanding the biz.  How does JD fit?

Eventful month with BRK AGM, Ning's dinner, Steven Shen (Oceanlink) dinner (see notes separately).  

Investment Mistake Log

Mistakes Log

- 0494.HK (Li & Fung) - what is a strong MOAT?  And buying cheap doesn't mean good buy.  Something that came from $15 to $4 doesn't mean it's a good buy.  Something Martin Lau buys doesn't necessarily mean it's a good buy.  Strong FCF doesn't necessarily mean it's a good buy.  Lesson: (1) when you're ignorant about the industry, do yourself a favor, go for low debt level (or better still net cash).  (2) understand the company's source of  (or lack of) pricing power.  Li & Fung lost their pricing power not only because of weak demand which is cyclical, but also structural due to more transparent pricing from ecommerce and internet (the likes of Alibaba). (3) I read the book about Li & Fung history.  So it followed naturally that I "knew" something about it and fell into that confirmation and/or availability bias.  

- 0902.HK (Huaneng) - Monopoly doesn't mean guarantee straight line upwards.  The microstructure of Power generation sector is different between China and HK.  Just because you made money from HKE doesn't mean you can make money from Huaneng.  In a regulated industry, the company's MOAT can be deceptive given lack of pricing power.  Interest alignment in SOE is dubious as govt uses SOE as policy tool.  SOE is used primarily to drive policy rather than for shareholder return.  Lesson: (1) false sense of security about monopoly and MOAT without good understanding of the different microstructures.  (2) cheap can become cheaper, PE=8 can goto PE=5.  High dividend will come down.  (3) ultimately, high debt is not ideal, judge the company's requirement to raise external capital (placement).  (4) be cognisant about SOE interest alignment.  (5) need to have a basic picture/understanding about supply and demand.  

- 2883.HK/ 0883.HK (CNOOC) / Gazprom - PE=8 doesn't mean it's cheap.  And for cyclical industry, it's a contrarian indicator meaning PE is lowest at cyclical peak.  

- 0603.HK (China Oil & Gas) - Lesson: (1) followed Joe Zhang in his book.  So stop listening to other people.  (2) Sizing - too heavy an exposure in this small cap cyclical name.  (3) Buying laggard - laggard lags for a reason.  (4) failed to act on first red flag - namely the purchase of Canadian oil assets.  (5) Debt - sensitivity to leverage is numbed when all is going well (pay attention!!!).  Only when the tide goes out we'll know who's swimming naked.

- 1083.HK (Towngas China) - this is not HKCG all over again, don't kid yourself! Should always be wary of a story of the next XXX.  Lesson: (1) Lack of understanding of the structure of the company.  The fact that the crown jewel projects are all residing still with HKCG (the mother) and Towngas is just holding the greenfield projects.  Towngas is just a step son.  HKCG always has a higher pegging order.  ALIGNMENT OF INTEREST!!!  The question of holding mother or son, and the bias about buying a "potential" duplicate.  

- 0010.HK (HLG) - a good company doesn't mean a good price.  PB=0.8 doesn't mean it cannot go to PB=0.5.  The key to buying NAV discount names?  When the insider is buying.  Ronnie Chan paid bottom price in 2016.  Lesson (2): the Liking bias.  Just because I liked (used to) Ronnie Chan doesn't mean I should buy his company (at any price).  The switch from Kam Ping Mansion to HLG was flawed without understanding historical PB band and where we are wrt to that band.  (3) Rationality: I wanted to buy something in the bull market and it felt safest to buy HLG due to NAV discount.  It was an emotional decision, not a rational decision.  

- Want Want (00151.HK) - Lesson: (1) didn't buy cheap.  Big absolute PE and PB.  Just because they trade near the lowest of the recent band doesn't mean it's cheap.  Cheapness is measured on an absolute basis, not relative.  (2) Lack of analysis: what was the free cash flow yield?  What's their strength, product / distribution / brand / pricing?  Martin Lau sold it because mgmt wasn't investing in the brands but focused more on cost/efficiency

Investment Philosophy

My Investment Philosophy

I am a value investor, meaning that I am not a momentum trader.  I do not chase hot stock nor hot sector.  The trend is your friend does not necessarily apply to me.   I tend to buy neglected, beaten down companies (often too early) when they receive minimum attention (lower volume than historical average). 

Buffett's word is gospel here: "The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs."  

- LKS has a similar motto.

And

"Speculation is most dangerous when it looks easiest" 

- think how over-confident I was in 2015.....

My primary objective is not to lose money. In tennis terms, i try (am learning) to hit a lollipop just to get the ball back within the lines.  Capital preservation (against inflation) is key rather than chasing maximum return.  

I don't trade a lot.   I want to invest in companies that:

1) Less prone to technology obsolescence and can last a long time with low maintenance. Ideally, if I get knocked down by a bus, my wife doesn't have to worry about what to do with the portfolio.  Another advantage is this type of portfolio can leave me lots of time to read and learn.  I am learning to adhere to the principle of buying assets where time is my friend not enemy (hence i don't like warrants, or net-net in a sunset industry).  I have a tendency to skew to asset that doesn't require thinking too much about exit strategy.  

2) I will allocate a a good portion of the portfolio (say 40%) to deep NAV discount companies with low debt, proven management and high quality assets - the Schloss way. The yardstick there is easier to define, and intrinsic value more objectively observable.  Company like Swire and Jardine are low maintenance if purchased at a good discount.

3) I might allocate a small portion of the portfolio in beaten down well-managed cyclical companies with very little debt.  Exit strategy is needed there.

I do not have a view about market move, nor have a view what's going to happen to the economy.  I am learning not to look at the market.  OK I admit, it's hard. It's like not opening your Blackberry or Facebook page for the social media junkies.

Risk Management Philosophy

Always be mindful that: "One of the most corrosive human feelings is to sit out and watch other people make money" - Howard Marks

My definition of Risk is not market (move) risk, nor the daily up/down movement (volatility as defined by academics). My definition of risk is the probability of permanent loss of capital such as accounting scandal, chairman disappearing, policy risk, technological advancement that makes a company's product redundant etc.

At my current competency level, I tend to focus on bigger cap companies (although research has shown that small caps make better return in the long run), with a good institutional culture, where management incentive is aligned with minority shareholders, good consistent operating and free cash flow, consistent and growing dividend, and some monopolistic features.

At my current competency level, I am likely to hold fewer than 20 companies and have a cap of 10% in any single company.  I might hold ETF as well.

I am aware of the arguments of always fully invested vs holding some cash.  At this stage, I am inclined to the latter - meaning that i might hold a good portion in cash (between 5-25% following the wise words from the Intelligent Investor, and the action from Buffett, Klarman, etc).  I want to put myself in a position where when market is crashing down, I am still emotionally stable and I still have dry powder to buy.  

Always look at the downside first before looking at the upside.  Sizing of positions should be a function of the odds and possible damage on the downside.  Err on undersizing rather than oversizing - think in terms of the Kelly's formula

FOMO and Over-confidence are two of the biggest risks in managing investments.

Cash holdings

Buffett: "Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent. When bills come due, only cash is legal tender. Don't leave home without it."

Some thoughts on cash holdings (cash allocation / cash policy)

Benefit of Cash:

- Cash is an emotional stabiliser. In bad/stressful times, having cash can help with calmer, more rational decisions.

- Cash gives options and flexibility.
- Cash has no volatility (from a non-FX angle)  

Negative in holding cash:

- Cash is like a dead weight, it drags down performance in good times

- Cash is forever eroding slowly due to inflation.  A slow death by a thousand cut.  Time is not your friend there.

- Cash is subject to exchange rate risk

So what's my policy in holding cash?

- mid market cycle - 75%

- high valuation cycle - 50% (sell high)

- low market valuation cycle - 95% (buy low)

Fully invested vs having a cash holding policy.  The sequence of events in a bull bear market makes no difference to P&L if money is not taken out of the system.  But if money is added (reinvested) and withdrew from time to time, then the order of event matters.  Hence having an implicit and disciplined buy low sell high strategy (which is what this cash policy is all about) helps.

Another way to look at appropriate cash allocation is the opportunity universe.  When opportunity is abundant (usually when market is depressed), then go fully invested (95%).  When opportunity is hard to come by (market is likely to be inflated), then reduce gradually to 50%.  

So:

Cash Holdings = 1/F(# available opportunities)

Cash Holdings = 1/F(valuation)

I should not and am not trying to time the market. If i leave the cash holding level as a function of available opportunities, and i always judge that on an absolute basis rather than a relative basis, this plan should work in the long run. A 50% floor is due to the fact that bubble or high valuation can sustain for longer than one can imagine.  US market rallied since 2009 for 8 years now.  I exited US completely in 2015, 2 years too early (still counting).  However, I will always get to the 95% too early in a depressed market and get to 50% too early in an inflated market, but that should still have a positive effect vs not having a cash policy.

Sit out and watching other people make money is one of the most corrosive feelings.  But keeping cash when you don't find opportunity is the precursor for having the cash when opportunities become available again.  

The Importance of Writing

Buffett: "Chain of habit is too light to be felt and too heavy to be broken".

I was never a keen (or good) writer and there was a lot of inertia to find ways around it.  But I've come to the conclusion that writing and reading annual reports are 2 essential ingredients in successful investing.  I need to build a habit in doing so.  After quitting MS, I formed a habit in my diary writing and freestyle kicking.  Both not natural to start with and now i will not do without.  Success breeds success when it comes to building good habits.  When it comes to doing the right thing, delay no more Andy (or I've already delayed for too long)!

The benefit of writing:
- it helps to lay out the logic and assumptions in an organised manner for a specific decision
- writing can help me to become more rational (BRK is the temple of rationality)
- writing (blog) act as an investment journal for record keeping
- most great investors write (think buffett, howard marks, seth klarman, etc), and i believe writing helps them to be a better investor
- writing helps to consolidate the investment process, or it is a crucial part in building that investment process
- it helps with discipline in investing
- blogs can attract constructive criticism
- a checklist is somewhat implicit in the investment write-up and will continue to be refined in this process
- it might (i stress MIGHT again) help with countering over-confidence bias if i am being honest with my writeup
- it is a concrete deliverable with future reference value rather than some wishy-washy random thoughts that cannot be tracked

The downside (or excuses) of writing:
- takes time and effort and discipline (oh well, that's the only way to improve!)
- if published, i may suffer from consistency bias (hence i need to be selective in terms of what to publish to avoid suffering from those bias)
- if i am any good with an idea, i may introduce competition in my investing (imitation is the best complement; and stop flattering yourself Andy)
- blogs can also attract unconstructive comments (life is too short to care about those)
- initially with sub-standard writeup, i will be showing my ignorance

This post is a self-talk in trying to get myself into the good habit of writing, to exploit the consistency bias to motivate myself.  It will take time for me to get to a reasonable standard.  But i gotta start somewhere.  Like my kicking in swimming, despite a late start, if i do it consistently and not giving up, i will eventually get better regardless how long it takes.

Revelation @ Ocean Park

Took Alistair and Ryan to Ocean Park just before Term 4 start on Monday.  Long story short, we tried to beat the crowd and had lunch at 11:30 next to the games area.  While we were eating the crap fast food there (wonder why they never serve decent food in amusement park?), we were watching people pay to play games at the stall to win those soft toys hanging above the stand.  And everytime someone wins anything, they'll ring the bell loudly (Remember 77777? the slot machine in the casino?).  There were many different games, a catapult game to get a frog into the hole; throw a ring into a bottle neck; throwing bean bags at the stacked cubes; basketball; kick soccer into holes; and a softball shooting game to name a few.

Alistair watched as we were eating and he was gagging to try his luck (or skill he thought).  He counted the frogs where people tried to catapult into the hole; he had "experience" with throwing rings into the bottle necks (we had a bucket load last time and got none in); and he knew how hard it was to dismantle the lead cubes with bean bags.  But he was confident that with his super soccer skill, he could kick the soccer balls into the many holes.  The result?

There was this one ridiculous game which i thought was a crime to be allowed in the Park.  The game was simple, just to throw a ball into any coloured squares.  But, listen to this, all the white squares had holes below them that drain the ball out for collection EXCEPT the coloured squares, which had a shallow base so even if you're skillful or lucky enough to land a ball in the square, it would most likely to bounce out.  This game is so deceiving that IMHO is a crime to conn the kids into paying (i mean playing).

I was the sober guy who kept telling Alistair the odds in each game (I wasn't popular to be honest).  But in real life, am I the sober one when it comes to investing in business?  How many times was I being conned into these seemingly easy games?

- Monopoly SOE power generator yet to realise that they don't have pricing power as the government use cheaper pricing from the power generators as a policy tool to stimulate economy
- Oligopolistic Oil company that seemed very cheap but that was trading at the peak of the cycle
- Downstream Gas Distributor with all the reasons to prosper given environmental concerns and monopolistic nature; yet to find out that the majority owner has a different agenda for this vechicle (crown jewel asset in the parent co)?

Other seemingly easy "games" that are known not to be easy that i am reminding myself to never touch:
- Capital intensive, yet extremely competitive sector of Airlines
- the very cyclical ports and container shipping industry
- cat risk prone tech industry (e.g. HCV drug, BMS Opdivo being killed by Merck's Keytruda)

In the end, we played the basketball game (which the odds were well understood) at the other end of the park where the ring was not as high up.  Ryan scored 2 out of 4, Alistair scored 1 out of 6 and I scored 3 out of 6.  We won an air Hammer and a Cookie Monster soft toy.

The lessons here are:
- Understand the role luck plays in a game vs required skills.  Operate within circle of competence (I am relatively more skillful at basketball than catapulting frogs)
- look at all the possible traps in the game (ie the shallow base in the colour squares game)
- operate only in a game where you understand the odds and can foresee the possible outcomes
- play in a "boring" game (vs a glamorous one) which you can almost certainly walk away with a small price at least
- find a stall with a good smiling operator that is happy to give you the price vs those stall operator with a bad attitude that hate to give you a price when you win
- don't get sucked-in by the bells of others' winnings!

Money vs Wealth

This is a piece to remind myself about the meaning of money.  This reminder is important as it provides the big picture to resist the useless emotion of jeolasy (which is the biggest enermy to risk management - i'll write a piece on this topic separately).

I have been reading news on Cheng Yu Tung, third richest man in HK and 57th or so in the Forbe's world richest list. He passed away at 91 after 4 years of coma post his stroke.  Another piece of news is regarding Joseph Lau, who is a shrewd stock market operator, but also a fugitive who has been reported to be suffering from kidney failure which requires dialysis 4 times a week.  This two men's listed entities probably woudn't have made you rich had one invested in them even from a long term perspective.

You can have all the money in the world, and yet, the money is used to prolong a low-quality life. Why would Cheng's family allow him to suffer an extra 4 years of coma? (put me in for NFR/DNR if it ever happens to me pls) And if I was Joseph Lau, i would probably be guessing the incentive of the people around me. The meaning of money for these tycoons is pretty useless at their stage.

What is wealth? Is wealth money?  Or something else?  I reckon wealth is a function of fulfilment, relationships, knowledge and money.  Money in this equation is a mean to facilitate knowledge gathering and fulfilment.

Money is a subset of wealth, and the purpose of money is a tool, a tool to facilitate learning.  To make learning more interesting.  And the learning will in turn make one a better human being.  In my case, to be a better father, and to learn to understand myself better and to remove the biases wired in my character.  Money accumulation, if done properly, is a 修練 (training for logical thinking, rationality, discipline and self realisation).

Reference: Maslow's Hierarchy, HKEJ article

Book list

I never had a good reading habit until i started reading Buffett's letters.  The book that drawn out my reading bug was Tap Dancing to Work (2013?).  The book that helped me to let go and quit Morgan Stanley was The Education of a Value Investor.  These 2 books are worthy of special mention here.

This particular blog is a working document, part of my filing system.

This is my book list, sectioned into
1) WIP - Books I am reading right now
2) Books queued to be read (and prioritised)
3) Books that I've read since 6/2015 after i became a full time dad (hopefully i'll start writing a blog on each book when i complete)

1) WIP - What I am reading right now
- John Neff on Investing (Audio Book)
-

2) Books in the queue to be read (this list is important as it is how books are prioritised to be read)
- The Base Rate Book 
- Quality of Earnings
- Value Investing - from Graham Buffett & Beyond (Greewald)
- anything i can find on Schloss
- Peter Cundill - as he got into Value Investing in his 40's
- 投資中最簡單的事

3) Books that I've read since 6/2015
- 用心於不交易
- 我的職業是股東 5/9
- Randy Kwei bio (7/8)
- 平民資本家 (16/8)
- 證券分析實踐 31/8
- 羅健昌-價值投資大時代
- Paris Value Investing - What they don't teach in Uni
- Snowball
- Party Man, Company Man: Is China State Capitalism Doomed?
- Shadow Banking in China - Joe Zhang
- The Most Important Thing - Howard Marks
- 香港經典并購
- 百年利豐
- 與CEO對話 2006
- Benjamin Franklin Biography (audiobook)
- Munger - the complete investor (audiobook)
- Fooled by Randomness (audiobook)
- 香港股史 1841-1997
- 居安思危
- Influence (Audiobook) 30/4/16
- The Aggressive Conservative Investor 11/5/16 - Martin Whitman
- Thinking fast and slow
- MOATS
- The Little book that still beats the market
- Manual of Ideas
- 黃國英
- A Conversation with Money - Tony Choi
- The Money Master
- The Money Master - II
- Business Adventure
- Vincent Lam - small cap stocks selection 捕捉細價股：市場分析實戰
- 價值捍衛戰 - Vincent Lam
- 步上一億元財富之道 - Vincent Lam
- One Man's View of the World - LKY
- 計論明星股 （16/9/16）
- the intelligent investor - audio book (24/9/16)
- 財經報導實戰手冊 (楊生華)
- *** 破解上市公司易容術 (黃玲)
- Quantitative Value
- What's behind the numbers (audio book)
- More than you know (Moubourssin)
- Why Moats Matter (Audio Book)

- Deep Value

- 郝承林 - 致富新世代二 科綱君臨天下

- Outsiders (Audiobook)

Never too late to start doing the right thing!

This is gonna be my first blog. I am finally pulling myself together to start this blog as a result of Paris-sir's good example.  I don't really have the intention for it to be read by the mass, but just a convenient way for me to jog down my thoughts over time, on a more structured and disciplined manner.  Perhaps one day, my kids will read it, and if i can leave them a trace of my thinking, and that they can find me online, that might have unintended good consequences.

"Chains of habit are too light to be felt until they're too heavy to be broken" - Buffett

I think the habit of writing blogs is a good one, in fact, it's like taking note on things that i've learnt.  Moreover, the ability to write down an idea or concept that i've learnt will in itself, consolidate that learning.  This is the main reason for this blog.  It should be a pre-requisite for me to write a blog on every investing decision. Let that be the self-imposed rule from now on.

Another good use of the blog is to add links to it.  So i have a centralised location for all the good articles and research for my easy access.

I wanna thank Paris-sir for his time over lunch, his sharing and kind comments.

I am gonna start slow and easy on myself.  So this is it for now.  Like my swimming, I know i can only carry on at my own (slow) pace. Most of the time, i don't push myself fast and far enough, but i think (at this stage) sustainability is more important.  If i over exert myself, then it becomes a barrier and disincentive to continue this effort.